Impact of different recovery strategies
Six months ago, governmental responses to COVID-19 focused initially on the strain on healthcare systems and their capacity to respond to the rapid spread of the virus. Lockdown measures were implemented around the world, and priorities began shifting to mitigating the economic impacts in households and different sectors through fiscal stimulus. Countries are now recovering to varying degrees, depending on the type of financial government support provided, their self-reliance in terms of sector structure and even their population demographics.
Reflecting on these differences, Maritza Cabezas, Economist Emerging Markets says: “China, which was the first to experience the pandemic, seems to be the first out of it. It chose to support its industrial sector, which lifted very rapidly, yet consumption is still lagging. Vietnam and Cambodia, which have younger populations are also faring better than others. Bolivia, Kazakhstan and Kenya chose to facilitate consumer spending by providing cash to households whose incomes had come to a sudden halt, but this approach is damage control and will not change their economies for the better. Countries relying on international trade and tourism have also been hit very hard and their recovery is even more challenging.”
It is too early to say for sure where the economic damage will linger long-term, but there are already signs of enduring generational consequences that will not be easily corrected. “In Latin America, as a result of the lockdowns many people are not accessing general medical help or vaccines for diseases like the measles. Education has also been suspended for several months, and while some schools have been able to provide online or at-home learning, many children and families don’t have access to the internet. As we write in our Emerging Markets Outlook, this is creating irreparable cracks on the road recovery,” says Cabezas.
Tim Crijns, Fund Manager of Triodos Microfinance Fund and Triodos Fair Share Fund, says that monitoring the difference in recovery strategies is an important analysis point when assessing the future outlook of the microfinance institutions (MFIs) the funds invest in.
“In response to COVID-19, we created a special dashboard to monitor various factors including country risk and the impact of local economic restrictions. We also monitor the impact on an MFI’s outstanding collection rates, and whether it has sufficient buffers and shareholder support to help absorb any potential losses resulting out of the pandemic.”
Triodos Investment Management (Triodos IM) also took additional steps to mitigate risks to its investors, to support MFIs and the microfinance sector at large, and to maintain the trust of end clients. In April it initiated and signed a Memorandum of Understanding with other leading microfinance and impact fund managers, to coordinate refinancing efforts in a responsible manner, thereby enabling MFIs to grant a suspension of payments to their clients. Crijns tells that there were also different strategic approaches as to how the moratoriums were passed on: “In some cases it was across the board to all clients, in other cases it was voluntary and the MFIs made an assessment as to who was able to reschedule loan repayments.”
In terms of safeguarding investments, Crijns says the MFIs have been able to weather the storm so far: “There are no bankruptcies among our investments due to the crisis, and all the institutions we invest in are still going concern. Uncertainties remain as to how well economies will recover, and the impact that will have on our investments. We have had to take some provisions, but they were exceptional cases. One was in Lebanon, which was experiencing social-political crisis before COVID-19 and then it suffered the explosion in Beirut. Another was in Peru, where a lot of institutions are owned by municipalities, and shareholder support to help absorb any losses is questionable.”
Need for impact investing stronger than ever
The international gap is widening. Around 23% of GDP in advanced economies is spent on recovery, while in emerging markets it is around just 5%. Both Crijns and Cabezas agree that Triodos IM is now even more aware of its role as an impact investor.
From an impact perspective it is vital that we continue to ensure that people in the real economies have access to finance because it means providing them with their foundation for recovery. The pandemic will create an education crisis, and a food crisis. Enabling small scale farmers to continue, and rural schools to continue, this is what people need and it can be well-supported by microfinance,” says Crijns.
Cabezas also tells that there is an opportunity for governments to play a more prominent role in shaping the recovery: “Governments have a say in how to direct their economies and can manage their stimulus together with central banks. Working with impact investors can be an important element of their recovery strategy.”
Silver linings and next steps
There have been a few small silver linings on the dark COVID cloud. Ways of working have evolved and relationships with international networks and trusted local partners have deepened and strengthened. There has also been a surge in the use of digital technology for loan repayments through mobile money, which Triodos IM highly encourages.
As for what’s next, Cabezas says: “The availability of a vaccine will be the game changer. If there is one by mid-2021 as many predict, the question will then become ‘when will it be available for everyone?’ A lot will depend on government budgets and on international cooperation regarding equitable distribution.”
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